The history of Australian property values

Please find below an epic chart pack created by Philip Soos on 150 years of the Australian housing market. Philip is a Masters research student at the School of Humanities and Social Sciences, Deakin University.

For those interested in the Australian residential property market, below are a collection of figures illustrating long-term trends. Housing prices and land values are compared to a basket of fundamental metrics. Australians are fortunate because much data on real estate and financial markets are publically available, going into depth not seen in other countries.

Comparing housing prices to inflation is one of the more common indicators in property market analysis. If the trend is fairly even over time, then there is no indication that people are favouring housing relative to other goods and services. On the other hand, if there is a wide divergence between housing prices and inflation, this tells us that people are considering housing to be relatively more important. Interestingly, every rise in real prices has led to a downturn, with the one exception of 1961-1964.

Another popular method of determining property valuation is comparing housing prices to rents. In a fairly efficient market, the costs of buying and renting should closely match each other, though due to factors such as taxes, risks, and interest rates, it is unlikely that costs will equal. Since the post-WW2 boom, the ratio has unevenly decreased. Upswings in the ratio suggest the presence of a bubble: the mid-70s, early 80s, late 80s, and today.

As with inflation and rents, housing prices have also outstripped incomes as well. Unfortunately, the ABS does not provide a long-term median household disposable income (HDI) series, so the denominator is derived by dividing aggregate real gross household income by the number of occupied households on an annual basis. This results in an unusually high HDI as averages are typically greater than medians, and is further amplified as the HDI is stacked with artefacts like superannuation which cannot be drawn upon to finance debt repayments. While the outcome is a rather low ratio, it keeps in line with that developed in Stapledon’s 2012 housing paper and shows a substantial increase from 1996 onwards. A more realistic median measure would result in a higher ratio, and the latest Demographia report shows it to be so.

It is easy to see the major cause of the Great Depression: a deflating land bubble, centred in the commercial property market. Every major rise in the ratio has resulted in a downturn, correlating with, and arguably, causing the economic recessions of the mid-70s, early 80s, and early 90s. The ratio has doubled from the trough in 1996 through to the peak in 2010. The substantial rise in the ratio during the late 1970s was likely due to an anomaly in splicing multiple land value series together, though part of the rise is justifiable because of a residential bubble.

The same story emerges when land values are compared with GDP per capita, which is arguably a better fundamental metric than GDP itself. As with the previous figure, the ratio has doubled during the same time period.

The Kavanagh-Putland Index measures the ratio of property sales to GDP. This metric is considered useful because in times of speculative fervour, investors flip properties to one another, increasing the total value of sales on an annual basis. When real estate markets tank, sales inevitably fall as potential buyers stand by the wayside waiting for further price falls. The ratio peaked in 2004 after housing prices jumped in the years previous.

The value of housing stock to GDP has likewise moved in the same direction as house prices to inflation and land values to GDP. It is the land component rather than the dwellings that has increased in value over GDP.

The primary determinant of the boom bust cycle in the land market is availability of credit/debt used to speculate on rising capital values of real estate. While data on private debt goes back to 1861, aggregate land values only begin in 1910. Debt peaked in 1893, driving a colossal commercial land bubble that burst, causing the worst depression in Australia’s recorded history. Again the same occurred during the 1920s, with the same result. It took until the 1970s for the debt cycle to assert itself once again, with one boom and bust after another. Debt reached the highest peak on record in 2008, driving the largest land boom on record.

Unsurprisingly, the cause for the massive rise in housing prices and land values, along with net rental income losses, is the colossal increase in household debt, primarily composed of mortgage debt. It has more than quadrupled since 1988, rapidly accelerating during the 90s and 2000s. The ratio peaked in 2010 as did housing prices, which is clearly no coincidence.

As household debt has climbed, so too has debt as a percentage of household assets. The ratio will rise as housing prices continue to soften. It has tripled from 1990 through to 2008 before the GFC, falling and then resuming its upward climb.

The same has occurred with housing debt to disposable income, tripling over the same time period.

Despite very high interest rates during the early 1990s, the ratio peaked in 2008 due to the staggering debt load of households, even at lower interest rates. It is no surprise that this ratio closely matches the net income losses experienced by property investors as shown in the next figure.

Perhaps the most telling of all data are investors’ ability to finance the debt and routine expenses on their residential properties. In the midst of the late 1980s commercial land bubble, an element of residential speculation caused real housing prices to increase, most notably in Sydney and Perth. Speculators suffered income losses from 1988/89 to 1991/92 while seeking capital gains. The market later stabilized before making the largest net income losses from 2000 onwards, signifying a zero net yield and massive residential bubble.

The obvious cause of these losses is due to the rise in interest repayments rather than running expenses, which have remained stable at around 50% of gross rental income. Interest repayments peaked in 2008, driven by higher interest rates before the GFC hit.

Not only is investment properties overvalued, the entire residential stock is. The vast majority of properties are owner-occupied, at almost 70%. Since 2004, all owners on aggregate have been running net income losses which do not bode well for them once capital values stop increasing.

Once again, it is interest repayments that are the cause of the income losses. A slight uptick in expenses during the 2000s surely didn’t help, but has since then fallen back to its long-run average.

Despite the best efforts of the National Housing Supply Council (NHSC) and the FIRE sector to spruik a housing shortage, the long-term trends show dwelling growth has consistently outpaced population growth since WW2. From 2008 to 2009, the trend reversed temporarily.

Perhaps the only positive factor is the government’s relatively low position of gross debt to GDP. The fashionable idea often repeated these days is that rising public debt poses a risk to the economy has little substance in reality. Compared to the pre-WW2 era, the governments of today are a picture of fiscal responsibility and prudence, with the rise in taxation revenue helping to offset the need for using debt. In the event of a substantial and prolonged downturn in the economy, the federal and state governments are well-placed to debt-spend.

A better measure of government debt is net rather than gross debt, and even better is the net rather than gross interest repayment burden, expressed as a percentage of GDP. What matters for countries that have high levels of government debt is how great the net interest repayment burden is. This is what separates the US and Japan – countries with a relatively high level of government debt – with the basket-case PIIGS nations (Portugal, Italy, Ireland, Greece and Spain). Australia is currently situated in an excellent position, and even if the government debt to GDP ratio were to rise, this does not necessarily translate into higher net interest repayments if the RBA further cut interest rates from already historical lows and purchases government bonds.

Increases in the government debt to GDP ratio are typically due to two occurrences: World Wars (1914 – 1918 and 1939 – 1945) and responses to economic downturns caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008. The rise in the ratio before the 1890s was due to colonial government mass construction of public infrastructure. It is obvious to see which type of debt today presents an overwhelming macro risk to the economy. Government debt will inevitably rise to counter private debt-deleveraging but it is very unlikely that political parties will engage in the necessary and timely expansion needed to ward off the adverse effects of debt-deflation.

In conclusion, the data presented should provide more than enough evidence to suggest that Australia’s residential property market (specifically land market) is vastly overvalued, driven by debt-financed speculation and the relative non-taxation of land rent. While land bubbles have been a continual feature of the Australian economy, what separates this cycle is the relative enormity of the boom in both land values and private debt. A smaller private debt to GDP ratio during the 1880s and 1920s was enough to produce two devastating depressions, including a number of recessions during the mid-1970s, early 1980s and early 1990s.

The question is often asked why housing prices are so high. Instead, the real question is to ask why prices are so low. The banking and financial system is ready to lend absurd amounts of debt to the willing army of “greater fools,” and has constructed an elaborate chain from mortgage brokers’ offices through to the business development managers (BDMs) at the banks in order to commit extensive fraud by manipulating loan application forms. This is the “six degrees of separation” Denise Brailey has uncovered. Consequently, the only determinant that prevents the banks from lending more credit is debtors’ ability to finance repayments out of current income. Only when it becomes difficult to finance repayments will the housing and land markets finally capitulate.

It is often claimed “this time is different.” It certainly is, but not for the reasons usually given: Australia has not experienced a land bubble of this magnitude in its history. 70% of adults own property, solvency of the FIRE sector is dependent upon ever-increasing capital values and the governments’ addiction to housing-related tax revenue and votes, it is none too surprising bubble deniers have been out in full force, asserting housing prices are based upon fundamental valuations. Also unsurprising is that all bubble deniers have conflicts of interest, and in an age of the secular equivalent of religious fanaticism and greed, facts and history are conveniently dispensed down the memory hole.

The only option left to policymakers is to continually kick the can down the road, hoping the bust does not occur on their watch. The result, as seen with the Rudd government’s additional First Home Owner’s Boost, was precisely that. This intervention restarted the debt machine, re-inflating housing and land prices to a new, higher peak in 2010. The overarching private debt bubble, which began in 1964, will likely come to an end once and for all when the government runs out of fuel to throw on the fire.

It is my position that there is no bubble, because we don’t have an oversupply and nor do our banks have an inability or unwillingness to lend, so for those two reasons there will be no crash.

No crash = no bubble…

I do accept that prices have been elevated for quite a few years and I have never said otherwise, but what would anyone expect during a mining boom, it’s what always happens.

In the period leading up to that big jump circa 1950 we had two major depressions, two major world wars, and almost a decade of price fixing for both rentals and house prices, so the jump was inevitable. For me that signalled the start of the modern era when any employed person could aspire to home ownership, although as I recall the home ownership rates started to improve in Australia around 1910.

House prices will eventually adjust to match the growth rate of household income (yes that is now two wages) but whether that takes two years or twenty years I couldn’t tell you, and nor can anyone else.

100 charts might look impressive, but they don’t answer your most pressing question – and that is “should I buy a house now or wait”

Peter, a bubble does not cease to be a bubble simply because it can be maintained by easy credit for a period of time. Its a bubble because the price paid is way out of whack with the projected income generated from the asset. With historically terrible yields and additional holding costs, not to mention stamp duty, the only financial reason to buy is expectation of large capital gains. If large gains ocur, then the yields get worse assuming rents continue to roughly track income growth.
This is why the bubble is unsustainable in the long run, even if it can be maintained in the medium term with govt subsidies, low rates etc etc. People will eventually realise their money is better off elsewhere, either slowly on in droves.

Squirrel I did mention that prices would correct to reflect household income, but as we pay a lot of out tax through property transactions, that won’t fall to similar levels as elsewhere in the world until we have similar tax structures.

RP – time is an important consideration in any long term commitment – it has to be. I believe you are a financial adviser or similar – you would know that someone who is 55 won’t get a 30 year mortgage, probably only 10 years and that might put them out of the market even if they now decide that they want to buy.

It would be foolish if it wasn’t part of the decision for those above 35 years of age and definitely a must for those above 40.

RP – time is an important consideration in any long term commitment – it has to be. I believe you are a financial adviser or similar – you would know that someone who is 55 won’t get a 30 year mortgage, probably only 10 years and that might put them out of the market even if they now decide that they want to buy.

I would agree I would place greater importance with a 55 year old if a house purchase was a goal.

But your position laces the statement that all age groups should buy now.. “‘cuz hey.. what’s a little bit of money”

I am pointing to an voerarching factor, of how markets work.

There comes a point where a price gets too high, that downward consumer pressure needs to be placed on price.

Accepting ever-increasing house prices is not acceptable, and you trying to alter their perception by framing time is of poor taste to say the very least.

It would be foolish if it wasn’t part of the decision for those above 35 years of age and definitely a must for those above 40.

Why would it be? What if their plan was to buy a house outright with cash in 10-15 years time?

Why pretend otherwsie.

Because ‘otherwise’ is the market behaviour of saying ‘no’ so housing prices come down.

Your view is a consumer should accept house prices no matter how high, because hey… time!.

Your self interest doesn’t extend to people effectively managing their lifelong chronology, it only extends to this years sign-on commission, and your ‘time’ reference is there solely to overcome another objection.

I genuinely do abhor a lot of young people having to endure a life of greater hardship than need be due to today’s high housing prices.

Today’s housing prices make it virtually impossible for a 45 divorcee who gets cleaned out to ever recover.

Oh come on Rusty – financial advisers don’t occupy the high moral ground – let’s just discuss this like adults for once. I am not personally affected by what people here choose to do, but I’m not going to pretend that time isn’t important when it is.

Money can be replenished but time cannot. If that fact isn’t important then I don’t know what is.

If you can tell me when the mining boom will end and unemployment will spike above 8% then I will tell you when house prices will correct in full. In the meantime in Brisbane we have seen about 10% nominal fall and at least that again in real terms, and that is probably about as good as it will get.

“…..Currently the percentage of homeowners that own without any mortgage is just under 30 percent. Prior to 1960, an actual majority of owners held their homes with no mortgage at all. For most of American history, the typical homeowner did not have any mortgage, not having to answer to a bank and also having some wealth to pass along to future generations. The primary impact of US homeownership policy has not been to increase homeownership, but to increase debt along with driving up house prices…..”

My personal conditions are not that disadvantageous and my views are not to benefit me or people who approach the organiastion I work for.

– let’s just discuss this like adults for once.

I am not personally affected by what people here choose to do, but I’m not going to pretend that time isn’t important when it is.

There are times, when there is a greater balance in our economy that time plays a great importance.

But our economy is not in balance, and the distortion, in my mind, now places excess weighting to the importance of price.

Money can be replenished but time cannot.

Money is still a finite stock, roughly 45 years of personal exertion. Spending greatre proportions of this 45 years on shelter harms people.

In financial terms, it harms their future decisions, their mobility, their ability to absorb risk.

On a personal level it affects their happiness, their leisure time, which is an important factor of the ‘time’ you talk about, time with spouses, time with children, and opportunites offered to children.

If that fact isn’t important then I don’t know what is.

OK, donate 100% of your wage to charity for the rest of the year, then write an essay how of little importance money is.

Time and Money are not a dichotomy.

If you can tell me when the mining boom will end and unemployment will spike above 8% then I will tell you when house prices will correct in full. In the meantime in Brisbane we have seen about 10% nominal fall and at least that again in real terms, and that is probably about as good as it will get.

You keep making that claim, and i don’t see any basis for it other than gut feel.

You have no point of reference, you have no empirical data, no iterations of data, not arching thought… the only thing we get is ‘this is the bottom, because that’s they way I want it to be’

No frustration or anger, just in the absence of rationale, you will obviously be shunted low on the list of arguments put forward.

Peter, can I just bring you up on that suggestion that Time is more important that Money.

Firstly, the “time” that you are talking about isn’t free time, to spend with your family. It’s more time spent in a mortgage rather than renting, that’s all.

Secondly, time IS money. Not just some cliche either, but if someone told me that I should throw away some of the money that I had spent the last few years working and scrimping to scrape together, I’d feel that I had wasted a large amount of TIME.

My money is being saved for my retirement, and for periods of unemployment, so it is the equivalent of free time.

Might I suggest that the value of both time and money to an individual rises as the supply diminishes, but I would rather be tapped on the shoulder by my bank manager and told that I have just spent my last dollar, than the alternative.

Rusty – of course it’s an opinion and like the other 500 opinions posted here daily it can’t be substantiated until the issue becomes a matter for history and the data collectors.

I have rarely seen you short of opinions Rusty – are you now the one who selects who can express one and who can’t?

Rusty – of course it’s an opinion and like the other 500 opinions posted here daily it can’t be substantiated until the issue becomes a matter for history and the data collectors.

No one can accurately quantify a prediction Peter, and I didn’t indicate as much.

I have rarely seen you short of opinions Rusty – are you now the one who selects who can express one and who can’t?

I didn’t say you couldn’t. I said your forecasting isn’t beyond gut feel.

Some here qualify their views based on data such as reversion to long term means, the likliehood of the retraction of extraordinary high income and terms of trade, the durability of speculative demand.

People here use such things to qualify their opinions, and to me bear greatre sense than gut feel.

Did you know that pre 1947 less than 40% of Australians owned their own home, but by 1967 that had risen to 70%.

Did you know car ownership also grew between 1947 and 1967?

So did TV ownership, so did the quality of holidays, so did the size of housing up to 1997.

All these material gains are what is called an improving quality of life Peter.

It’s a pretty simple concept, and it is an element of what is put forard to the debate about the future of housing here by your betters.

You instead cling to the hope the status quo maintains your trailing commission, then insert red herrings like the above, hoping it can rationalise away your self interest as some else.

The mean that you refer to was for a period that encompassed great economic change and has only lasted a few decades, that also was a period of great social change that won’t be undone.

Actually the mean I refer to is Robert Schillers index which stretches a coulpe of centuries.

Combining this, with a greater economic conceptual framework, such as division of labour, specialisation and the wealth creation effect of productivity increases, they all combine to serve a purpose of ‘mean pricing for housing’

When Adam Smith discusses the 3 income outlets to capital, income and economic rents, and that it ratio do tend to trend to mean, and when they are out of whack, economies suffer dislocation.

Then dislocation crahses the economy anyway, with the bottomed out clearingprice ultimately restoring the balance.

So regarding this balance as something which will ultimately, always occur, and believing current housing prices are symptomatic of imbalance, then restoration of mean will occur, because that is how economies do, and must work.

Tell me – exactly what is the mean?

We have a long term average of the cost of capital acquisiton being 30% of a solitary wage, then housing prices reflecting a value inferring the imputed rents plus an embedded ‘foregone consumption’ premium enabled by housing mostly being sourced by debt.

What is the period that you refer to, and tell me why we MUST revert to it?

Even for living memory, let’s point to 1994. We must revert to it because other parts of the economy rely on spending being directed to it.

If we don’t, we maintain (excessive) payments to housing, then the part of the economy that has forfeited that incmoe flow will diminish.

The previous flows were enabled by excess debt, that is we can observe marginal debt increasing for the last decade.. all until no more debt can be taken on.

In the absence of debt maintaining this spending shortfall, some other entity obviously has to incur a income deficit.

Housing or Business.

You retract it from business, you create a further imbalance.

Do you think that it’s ever likely we will revert to the 19th century mean?

Possibly. My main claim is, it WILL retract in terms of price/income multiples that are evident now.

The economy can not sustain the burden it imposes.

I express my doubt it will be a voluntary decision, or even a sound policy decision, but more likely a crash.

What is so absolute about a 20th Century mean that it must be adhered to and can’t be contested?

You can contest it… I would actually like to see you contest it and and a concept framework.

But all we get from you is …

“My gut says this…. so have you examined 1947 ownership rates vs 1967…” with the statement meant to argue itself.

And to be honest, that is a technically as sophisticated as you can get, usually it’s of much lesser quality.

3) “Urban growth constraint planning”: back to high land rent, high cyclical volatility.

Stage 3 is entirely a self-inflicted political choice. Whatever parts of the global economy that remain in phase 2 will be economic and socio-economic stand-outs in the decades to come.

The UK is an example of an economy where stage 3 is the most advanced in its destruction of the entire economy. Rusty Penny will be proved right eventually, just as Ludwig Von Mises will be proved right eventually. Pernicious economic land rent, and continual monetary inflation, will both lead to final catastrophic systemic breakdown. The “mean” that will be reverted to will not be pretty.

Stable currency and the minimisation of economic land rent both help to create an entirely new “mean” that is sustainable as long as the common-sense policy settings survive. Long may (parts of) the USA remain a shining beacon on a hill.

Please note that many of these charts are freshly constructed from a variety of statistical bases and go way back: Government Debt to 1850, Private Debt and Household Debt to 1861,Constant Quality Real Housing Prices to 1880, Dwelling to Population to 1882, Housing Stock to GDP to 1901, Land Values to GDP to 1910.

These build on Stapledon et al and no one has seen them assembled like this before, so you Dear Reader are blessed.

Agree, Philip Soos is an emerging national treasure. So is Leith Van O.

There is little analysis of this quality being done in any other countries around the world that I am aware of. The mainstream economics and financial punditry professions should have no credibility left as one property bubble after another implodes all over the world without a murmur of warning. In fact the chorus has consistently been of “there is no cause for alarm” and “we’re different”.

HnH – How do you see this stubbornly high price plateau being affected if Australia starts getting involved with the AUD devaluation/currency wars?

Your other article today mentions you would like Australia to devalue the AUD like crazy. My concern is that such action will likely assist with sustaining/growing this stubbornly high price plateau and therefore is not conducive to a significant property price fall & decent interest rate earnings on savings.

Take the first chart as basis for “long term reality” with index=100 (i.e. prices track inflation). We are currently at 400, which means we need a 75% reduction in REAL prices in order to revert!

Assuming no NOMINAL falls, that’s a LOT of inflation & related pain for 80+% of the population who either don’t have a mortgage/minor one/will in future, just so the LMI-lovers & equity-mate crowd don’t have to take a loss or declare bankruptcy: both of which are appropriate outcomes in our existing financial system (rules).

“……Even the “great depression” of the 1930′s was far more affected by property price volatility than by share market volatility, and the entire economics profession has been decades completely missing the bus on the role of property cycles in the whole economy.

There has never been such a period of sustained economic growth as 1950-2000 in most first world countries precisely because property prices were so stable for all of this time. The UK is a significant exception both with property prices and economic growth, proving the point. So, in a slightly different way, is Japan. The reason being the UK’s urban planning system, and Japan’s actual shortage of land…..”

“…..I think there is a major irony in the fact that economic cyclical volatility, linked to “property”, was high in the era prior to “automobile based development”.

Fred Foldvary is the expert writer on this. He notes that these “cycles” were strangely interrupted between the Great Depression and the 2007 crash. Except that there was an earlier weak cycle associated with commercial RE and with California RE, in around 1990.

But Foldvary has not worked out the connection with urban land “supply” consequent on automobile based development. Note that the UK imposed “anti sprawl” planning in 1947, and they had NO interruption in the property-based cyclical volatility. However, numerous countries that did have pretty much unconstrained “sprawl”, did experience decades of stable economic growth. France, Sweden, Australia.

This lulled everyone into a false sense of security, and few people even yet, see that “urban growth constraint” as a deliberate policy, returns the economic norm to the “pre automobile” era – i.e. high cyclical volatility.The artificial “boom” that represented the “up” phase of this returning volatility, was also seriously misinterpreted as a new norm…..”

Aussies have shown a dogged determination not to let their houses be repossessed. It’s interesting to see that at the peak, interest payments were only 14% of disposable income. The way people complain I thought it was much higher.

You guys should look at historical average interest rates (over say 50 years) when calculating debt service. Interest rates have been kept down artificially low by central banks resulting in the illusion debt serviceability.

As the world is gappling with manufacturers supplementing horse meat for beef in lasagne and water down bourbon to control input costs, you will find that the 30 year era of low rates should be coming to end soon. If you calculate debt service at say 10% interest rates, you will find that graph looks more like a hockey stick.

30 year era of low rates? Dude – interest rates in Australia hit 17% just a tad over 20 years ago! We have had low interest rates here (average 6% to 9% typical mortgage rates) for about the last 15-17 years, ie since the mid-90s.

I would also note, that prior to the early 70s, interest rates in Australia were also very low (around today’s levels) for the preceding 50 years or more. So it may be the high interest rate / high inflationary period of the 70s and 80s that was “unusual” in the long term historical context.

sorry gonderb…RAT is my own nomenclature.. I’ve ranted about it so much here I presume everyone knows what I’m saying.

Real After-Tax

I’m not sure why everyone ignores tax when talking interest rates. Decision making includes what’s left after tax.

Now I probably exaggerated a bit! Sorry. My impressions of inflattion at that time were higher than the 7% odd the historic data reveal. So to that extent you are correct to question my statement.

The 17% Cash rate didn’t last for long. It did kill the economy and inflation. The official Inflation rate was about 7% for over a decade. For most of that time interest the cash rate was about 9 to 12%. Take 10% as an example. If you borrowed at 12%, paid 40% tax your RAT rate would be close to zero. Houses were a GREAT investment in those circumstances. Effectively you can leave assets unused and make money. Great economics! It depends a bit on future expectations.
OTH savers were really screwed. My memory tells me nominal IR’s for savers might have got to 7% odd (I’m open to correction) but even take 10%. If your marginal tax rate was 40% you only ended up with $6 which was below inflation.

Unemployment. With one of biggest bubble economies in the world, we are also one of the most expensive which makes us globally uncompetitive (ask any tourist). High prices are needed to sustain debt service. As a result, there is receding demand for our goods including Aussies who shop globally for better prices (ask your local retailer or check your latest internet purchase).

We are in the process of bleeding jobs now – see real Roy Morgan unemployments numbers circa 10%, not politically convenient ABS numbers. You can’t have a bubble and compete globally, so it’s a case of bubble or jobs – our leaders are clearly choosing bubble as they don’t have the guts to take the hard road to prosperity.

“High prices are needed to sustain debt service. As a result, there is receding demand for our goods including Aussies who shop globally for better prices (ask your local retailer or check your latest internet purchase)”

Prices set wages and wages set prices.

Because of the debt most workers must now work for a minimum amount of money that is quite high, and is required to be sustained for the next 30 years. This places additional pressures on society. Where does this money come from?

The extra amount of money required for debt service is not earned through increased productivity, it is levered out of the economy through inflation that is cleverly hidden.

Does a worker in their mortgaged premises work more productively than one who is renting? Now there’s a basis for an interesting study.

The former certainly requires more income to service their massive debts and maintain the same standard of living.

Prince, is it a double edged sword? If we create more credit by lowering interest rates, Austrlian prices remain elevated and our exporters suffer due to being uncompetitive resulting in unemployment in sectors like manufacturing.

“…..Currently the percentage of homeowners that own without any mortgage is just under 30 percent. Prior to 1960, an actual majority of owners held their homes with no mortgage at all. For most of American history, the typical homeowner did not have any mortgage, not having to answer to a bank and also having some wealth to pass along to future generations. The primary impact of US homeownership policy has not been to increase homeownership, but to increase debt along with driving up house prices…..”

Stability breeds instability (thanks Keen/Minsky). Those who believe in the thesis that we have reached a “permanently high plateau” because of structural changes (lower int rates, 2 income families) are, frankly, morons.

Watch this space. I think that either the alleged “oversupply” that was California, Nevada and Arizona, was no such thing, or the alleged “shortage” that is Australia is no such thing. The actual data is surprisingly similar.

There have been a few commentators who have been skeptics going back a while before Philip Soos came on the scene, but most of them have not provided analysis this thorough and convincing. Leith Van O has been the outstanding one.

Glenn Stevens and Anthony Richards deserved credit at one time for being the world’s sanest central bankers on the subject of property prices (Don Brash in NZ was 15 years ahead of them) but seem to have been “shut up”.

Thanks for all the great charts.
My only request would be to redo the appropriate charts normalizing them for the wealth accumulation that naturally occurs around the peak earning periods of ones life. I think the demographic of the baby-boomer bump progressing through this peak earning period and towards retirement will correspond amazingly with the growth of housing debt.

because if they are not then the household balance sheets look pretty good because this savings represents more than 100% of GDP.
Also how does negative gearing effect the data, and how is rental income treated in the balance sheet?

OK so it seems that households are making more rational decisions than the figures suggest and that the net asset liability position is almost square and in line with every other decade in the last 150years

All I am saying is that the figures presented are so bad that if they were true then there almost certainly would be a crash, it would have happened ages ago. There still may be, but prices seem very sticky and the RBA has been leaning against them for years. I think that there must be loopholes in the figures.

For instance when I look at my own balance sheet, I look at all my assets and as long as my debt to net worth is pretty constant I am OK. I look at super as one of my assets. And in time without the morons that want to destroy our economy steeling it, or restricting access to it, it is a great system.

I think also that balance sheets have expanded through gearing arrangements and that these distort the figures.

When we really go through the numbers, the government has very little debt, the public is in a fine position, net of super and not only that, more than likely property here is going to be in demand from overseas. I think it will take at least 100 years for the Chinese to completely trust the government after what they have done and we are going to be the benefactors…didn’t you see how much we liked the Chinese girl in the tennis. The money will flow to us in droves.

Sorry but I have a tendency to feel that the bears may be embarrassed again.

I can only see two ways to revert to the norm:
1)Wage price inflation with appropriate AuD devaluation.
2) Asset price devaluation with the inherent risk of personal and systemic insolvency

Talk about bad choices, is there a middle ground that I’m just not seeing?

If I were in charge I’d choose Inflation because I’ve seen how soul destroying the long slow deflation in Japan was. I doubt many Aussie’s have the stamina for such a long journey.

Now the big question is, how to ignite local inflation in a ZIRP bound world?

I suspect the inflation ignition mechanism will be imported inflation arising from commodity price flow through in Asia. Unfortunately for Australia this probably means that raising Inflation and raising unemployment will go hand in hand (aka stagflation)(as in today’s Greece/Spain). It wont be a pretty sight.

My bet would be option 1 as no one wants option 2.
In a normal world it would be a TOT crisis.
I do believe however so long as we retain domestic stability in terms of law and order we wouldn’t see stagflation re Greece or Spain as we would remain an attractive place to emigrate to , particular if we became affordable

Inflation is NOT a solution!!!!!!! Inflation is sending your civilisation on a path to total ruin. It’s just another method of kicking the can down the road while making the final outcomes worse and worse.
Am I the only one here who is so bloody old and stupid as to have been in business during the last bout of inflation in the 70’s? You think it is some picnic…well it is for Govt employees I’ll grant that.

Make no mistake about this…inflation impoverishes your productive and efficient industries. Your exporters get killed. The powerful including powerful Trade Unions, Govt employees, Law and Medical associations, monopolies and oligopolies get their compensation for the inflation. The productive, free enterprise, and the weak and poor in our society get killed. Despite the latter, after all the inflation and the social dislocation, your responsibilities to your social system have not reduced. you still have pensions etc to pay…and they need to be increased in line with the inflation….so the NPV of your future outlays, your liabilities, increases with the inflation you have set in motion.
In the end you have destroyed your productive sector for what?

Speculators, in their various forms, do not just suddenly lose all nouse during periods of inflation. We will be unable to have positive RAT interest rates. They will be way negative. Thus debt will pay even more handsomely than it does now. So debt GROWS! It does NOT decrease.

My suggestion for some months has been: use the unavoidable inflation episode to “inflate away the debt” simultaneous to abolishing all regulatory constraints on urban fringe growth. Aim for the needed reversion to long term reality in REAL urban land prices, without a fall in NOMINAL terms. This happened, more by luck than intent, in NZ in the 1970′s after a property price runup.

Flawse, you talk about the productive sector getting killed. Inflated real urban land prices also kills the productive sector, already has done. I have devoted some lengthy comments to the many ways this happens.

There is no painless solution. I would opt for the “burst of inflation”, reversion of real urban land prices to competitive levels, and resume sanity from there.

Phil…yes I value your contributions re urban planning etc
Where we differ here is “burst of inflation” It ain’t gunna be a ‘burst’

Also as per my arguments above inflation solves nothing.
Thinking out loud…suppose you go around and confiscate any savings and forgive as much debt as we can, given our Foreign debt situation, what have we gained? We still have exactly the same economic settings of too much consumption, too little production and an accompanying reckless attitude to future debt as it gets forgiven. In addition nobody will ever save again. In essence we just make everything worse.
This is essentially inflation compressed in time except that the damage to the productive sectors would be much worse over a longer time.

P.S. Yes urban land pricing, with the accompanying credit assignation, has helped destroy production.
Why now make the destruction worse with inflation?

From my experience Australian emigration is only attractive for two groups
1) those that have nothing, since they have nothing to loose
2) the very wealthy Chinese, because well even if they loose half of what they have they’ll still be very wealthy.

I’ve been trying to start a business here in Australia for over a year now and I can tell you plenty of stories of skilled middle aged Engineers and Managers that simply said no thank-you, Moving, even temporally, to Australia just does not make sense.

Invariably, with the businesses that I evaluate, I find my recovery plans (there is always something wrong) require managerial and technical skills that are either non-existent or in very short supply in Australia. In every DD case so far I needed to bring skilled labor to Australia, and in every case the high cost of living was a major factor in their decisions not to proceed. If I’m honest Aussie tax policy also played a big role in two of the decisions.

The two big problems were Aussie tax treatment of Employee Stock Options and the world wide income tax for all residents.

The main issue with the world wide income tax was the possibility of unrealized capital gains being taxed in Australia. Most of the individuals that I was talking with are not rich but they are also not poor.

Say they are 50 years old and have total net assets of $2MUSD (stocks bonds whatever) When you move to Australia this is effectively your asset capital base, which is evaluated in Aussie Dollars. When you leave Australia if either the assets or the dollar AUD have changed than you have a capital gain which is taxable. Unfortunately this is a one-way function because if you make a loss you have no way to carry it forward (remember you left Australia) A gain however is taxable.

I’m trying to bring top notch peak productive talent, not just anyone, so I don’t find it surprising that they have accumulated $2M (remember that’s only 2 or 3 Sydney houses)

The lack of a good ESOP system also stops me constructing a package that properly rewards their risk and covers this possible capital gains Tax liability. We are actually moving ahead with one of the business ideas but we’re doing so outside of Australia.

I looked at FIFO but why engage in this sort of almost fraudulent manipulation. If the local gov’t doesn’t want me or my sorts here in Oz than ****-em I’ll establish businesses elsewhere.

Thanks bg0, I did look into this and received an ATO private ruling. Unfortunately the ruling was not favorable.

BTW: I accept it is my responsibility to adhere with Aussie tax law and to learn what is needed. BUT Where is the corresponding ATO responsibility to construct internationally competitive / compatible tax laws, so that a reasonably careful, experienced, honest businessman, can simply get on with business?

This may come as a shock BUT there is something very wrong with a system where I need to plan/construct my business around the local Tax law, rather than just complying with the law.

“This may come as a shock BUT there is something very wrong with a system where I need to plan/construct my business around the local Tax law, rather than just complying with the law.”

You do realize this applies to every citizen and not just business.
That is why we have financial advisers for our super management.
We have accountants for out tax management.
We have specialists for choosing the best bank loans …. etc

For you to get what you want, we would have to (simplify) have something like tax on only one item ….. income tax, or GST, or business tax, or resource tax, etc. If we keep things too simple then the tax system becomes unfair to many people.

Terrific work Philip. It should be mandatory for anyone commenting on property to come here first and see the data before spinning yarns about ‘fundamentals’ and so forth.

The graph of the Kavanagh-Putland Index, and the final graph of government and private debt are the stand-outs for me.

The KP index, to me, seems to show why our economy seems to be doing fine despite the massive price build up in property. The peak around 2004 had not seen a sudden decline, but a slow winding back of speculation. Perhaps achieved through repeated attempts to stimulate the market, and through income boosts from mining investment.

That’s a good thing.

The graph of government and private debt simply makes you appreciate the bigger picture. When there is something important to play for the idea of a balanced budget goes out the window and we do what is necessary to get the jobs done.

“The graph of government and private debt simply makes you appreciate the bigger picture. When there is something important to play for the idea of a balanced budget goes out the window and we do what is necessary to get the jobs done.”

As long as you continue to ignore the CAD, the Foreign debt, and the sale of assets to foreign interests.

This self-adulation at our low government debt is way misplaced. It is simply a mirror image of everything that is wrong in our private sector. Negative RAT, general neglect of the CAD and it’s repercussions, result in a private economy running at an ‘artificial’ speed. This results in increased government revenue which made Howard’s (artificial) surpluses possible.

To now go all out for a government deficit, in order to attempt to maintain the previous excessive increases in private debt and speed of the economy is simply continuing to dig the debt hole, in which we are now stuck, even deeper.

Between a rock and a hard place, running a government surplus when overall your nation is running a CAD will have the result of rising unemployment and increased welfare expenditure. As you say Flawse the answer is back in time and a restructured economy, so I suspect the rising unemployment is unfortantly part of the pain, as well as rising inflation as the dollar drops.

P.S. We won’t just have rising inflation while the dollar drops. Not only will we have inflation due to a falling dollar the basic demographic and prosperity changes ensure continued imported inflation. Granted you can subtract a bit for technology advances.

Further the inflation in teh tradable sector will feed straight into the non-tradable sector as the non-tradable sector is mainly the powerful groups in our society in all their forms. These groups immediately seek compensation and get it.
Thus your inflation becomes more or less ingrained in your economy and builds on itself.

“…..the non-tradable sector is mainly the powerful groups in our society in all their forms. These groups immediately seek compensation and get it. Thus your inflation becomes more or less ingrained in your economy and builds on itself……”

That is why I say wisdom and courage is needed now to change everything against the non-tradable, rent-seeking sectors in conjunction with accepting the inevitability of the coming inflation. This is why I say that inflation could be used to advantage to “inflate away debt” and avoid negative equity as asset prices revert to sane real levels. The crucial thing is to get the asset prices reverting to sane real levels as the inflation is occurring, rather than bubbling to new highs.

After that, finish the inflation, and go forward with competitive urban land prices – Southern USA shows the way.

Very nice compilation of data Soos!
Prices have clearly gone up even relative to income, and repayments only kept under control by lower interest rates.
But will prices fall? The ABS data shows the price rise has all been in established homes; new project home prices have been stagnant for years. Demand remains very strong and supply limited (with the possible exception of apartments in Melbourne) in the middle of the main population and employment centres.
There is some political pressure building to allow young people to use super balances to get into the property market. Thoughts?

Push to allow prospective first home owners to use their super to fund property purchases is being spruiked by the RE lobby (and their cohorts, including mortgage brokers etc). It’s a stupid idea, only ones to benefit would be those approaching retirement who need to flog their investment properties to extinguish debt/fund their retirement.

Exactly, Rusty. Housing, owned by yourself, is NOT “retirement WEALTH”, it is somewhere to freakin’ LIVE rent-free when you are on a pension…..!!!!!!!

Pity retirees still paying rent after a lifetime of paying rent. Making it impossible for an increasing cohort of people to ever own their own home (interest only loans do NOT count as making someone a “home owner”) is just setting people up for a miserable old age existence. Fiscal abuse when young, fiscal abuse when old. So much for the social contract between generations; the boomers have shafted their followers.

“The main reason someone can’t get into the housing market is because as stated before, the pricing mechanism is broken. In this case, prices are too high.”

What about these for reasons:
1) rather spend money on fags and booz.
2) rather have holidays than save for house.
3) gambling.
4)Have more children than one can support properly.
5) one or mote family member does not want to work in the beginning to get onto the house ownership path.
6) pecker not kept in pocket so girlfriend getting pregnant before now parents being established.
7) not wanting to get a decent education to be able to get a decent or any job.

(a) our economy continues to thrive, wages grow: without a change in spending patterns we would expect to see a fresh spike in inflation, higher interest rates. ….in that case the proportion of the family budget to fund said loan will increase (disproportionately to increase in wages)

(b) our economy slows, business spending and confidence dips, inflation (and interest rates) low: expect higher unemployment, low (or negative) real wages growth. …if you’re not employed, you’re certaintly not going to be able to fund a mega-mortgage on Newstart allowance. Demand/Supply balance will be thrown out of balance through capacity utilisation, with household sizes to grow (requiring less supply), while supply will increase with the aforementioned families (or their banks) having to sell

Also let’s not forget the massive shadow looming of population about to hit the trigger on their “retirement” plan: aka, sell their investment properties, extinguish debts & be left with a gazzillion dollars to ride off into the sunset with. That’s a huge supply set to hit the already (in many areas) overburdened market)

…also (this is turning into a rant) it is very likely that negative gearing will be abolished within the next decade. It hasn’t fulfilled its purpose and now is burning a big hole in the public purse… Political suicide, but you want a surplus? We can give you a surplus

Our numbers indicate that residential LAND values are overvalued by as much as 70% (so a 40%+ fall would be reasonable). For a “cheap” suburban house & land package with a price tag of $350k, we would expect to see prices fall by 20% – 30%

It is a good article including many graphs showing various aspects of the housing/land situation over the long term. Something has been going on for 40 years. Is it a bubble? A bubble of what? This should be discussed.

I was saddened to see Soos fall into the same trap as the shortage-deniers regarding the number of extra dwellings vs the number of extra people. This ratio is completely useless in determining the extent of housing shortage. Does anyone know why?

The decline in number of persons per household is a major factor in determining relative levels of demand over longer periods of time. The chart is probably better reflected as one of household formation rates vs. dwelling construction.

Household dynamics is the primary reason why the construction “boom” of the past 40 years has been more or less absorbed (as household change refers to all households, including those already in existence before migration/pop. growth).

For data check out Census, ABS & Australian Institute of Family Studies (AIFS)

Actually we calculated the numbers of “Housing Cost per Householder” (“Housing Cost”), adjusted for taxes, inflation and interest rates.

Back in 1970, in Melbourne, the Housing Cost was 1.05 x median wages. In 1990 it was 2.68 times median wages. In July 2012 it was between* 4.46 and 4.81 x median wages.

…That’s a per person Housing Cost increase of between 323% and 357% in around 40 years.

*range calculated on current [ 4.46 ] and long-term historic [ 4.81 ] interest rates. I felt it important to include interest rates, as I was interested to see whether the hyperinflation & extreme interest rates of the late 1990’s did indeed mean that housing was as unaffordable back in the 80’s and 90’s as it is today. Answer: No, it isn’t

How does fewer children per family fit into this equation ? Because having two children instead of five reduces your household size substantially, but leaves the number of houses required (one) unchanged.

Since its the aniversary of K-Rudd’s sorry and everything perhaps we should reflect on the fact that European settlement of this great continent is one massive land grab after the other. It’s the national mind-set. Steal land, sell it or dig stuff out of it and sell it.

Precisely Insight. These charts can mean anything depending on what you believe to be the force which drove the line in any direction. Charting two things against each other on the one line makes it look nice and simple but separate the two factors and it can give a different picture.
You actually have to admit that you don’t know!
Only if you are honest ,that is.

Thank you Leith for putting this great post together and to all the commentators for brilliant comments. This is stern stuff and I will be taking this with me when I head off to Ireland in a few days and I will show it to some folk I know who were involved in the Irish Ponzi before it fell in a heap.
Have a look at this clip made in 1998 well before the 2007 crash..yeah it took a while…with regard to Australian banks offering loans of plus 666K to 25-30 year olds (i know several) who earn average salaries in unskilled service jobs…this is phoney money lending and now the ASX is over 5000…seems like they all want to fall with a bigger bang from a greater height.

The debt burden is surely crushing the world. I suppose the banks are pretty pleased with themselves. I suppose the indebted population is looking around rather sheepishly, wondering what to do.

As many have pointed out we are in a pincer. On one hand we need to become more productive and competitive. On the other hand we have the debt that fixes incomes and prices to uncompetitive levels required to service the debt.

We also have this strange, and undeserved sense of entitlement. We are far too superior in ability and intellect to make knives and forks, beach balls, clothes pegs, and those little plastic bits that are used in the ends of pens to stop the dust getting inside.

Besides, we can’t possibly make them as well, and as cheaply, as those that already do make them, so why even try?

Its going to be a rough couple of decades while the economy struggles under the current debt burden. Maybe in the meantime we’ll get over ourselves, actually cherish the simple things in life instead of simply talking about how we do, and start getting productive.

RP from my actual experience and I was in Industrial design/engineering, one can design and IP products (mass produced) and outsource them but when you approach the smug bastards who are the buyers for Bunnings etc, what you find is that they have this power to block your product for any reason they like. I know every product may not be a goer but these buyers have no interest in Australians designing anything,
It is a weird thing seeing Australians destroying fellow Australians…

I couldn’t agree more. Value added export is the only real sustainable long term path to wealth.

Australia is the last country in the world that needs to hit the glass ceiling Japan hit, because of absurd urban property Ponzi, rent-seeking and wealth transfer. Look at how much more land Aussie has per person. No excuses for “preserving food producing land”, unlike Japan.

Nice sentiment but a little simplistic Rusty.
What do you suggest this “something” should be which has a $0.25 margin and is sold to 20% of the Indian middle class, what makes you so sure they would buy it and who is the designer/manufacturer that should do this? Sounds mighty expensive!
You can’t stop the developing world developing at a faster rate than the already developed world.
Free trade is free trade and will operate both ways unless you believe that we are somehow inherently smarter than them.
If we can make something and sell it to middle class India, they can do it cheaper….and will. What nutter would make the investment knowing they will be copied and their business smashed by foreign competitors operating under a totally different law. Try and convince the Chinese Government!

Guys just look at the unemployment rate and the growth of permanent jobs, if it goes bad, surely debt servicing will be tougher on aggregate. This will cause the housing price to collapse. Just like the US, when the auto industry went bust, causing widespread housing bubble.
Just give it another 3 months or so, when savings run out….

Households in the US which were servicing too much debt became victim but this is also to do with the money is lent in the US and the laws around it. I can tell you that not all property in the US is cheap now, it’s a certain type of property which has been over financed and occupied by those who really couldn’t afford it.
If we allow this kind of borrowing to take place here, you might be right but our unemployment rate is not likely to slump to US figures.
I am not long back from the US and I can tell you that the skyline is a mass of cranes like I haven’t seen before. Things are on the up over there, they might have LONG way to go to recovery but they are on the up.

Governments know that the key to economic growth is basically first higher/confidence in housing, and with rates the biggest driver basically, it’s not hard to work out how they can do it.
The problem is the lower rates go, the more retirees are screwed, and property values screwed on the high end.
The government also need to consider restricting the cash rate on the downside to stop speculation, and make those who cause the economic problems to once in their lives pay for it. I know the reality is not this.
I like the way credit Suisse are now lending money I think at 4.25% for those with assets over $2 mill. Does that make you more likely to speculate? For some no, but the majority likely yes.

I agree. But it isn’t the government of the day who controls this. Whatever political party might be in power is irrelevant, the RBA certainly does not consist of OZ government officials. The banking families operate independently and I think we can expect a roller-coaster type of economy while the first world exists.
This is, of course, is how the rich have always made money above and beyond inflation without ever contributing to the labour force…but the obscenely rich who control the money, how much do they make of the induced cycles?

It would be most interesting to see Texas overlayed on the above graphs.

There are Australians such as Geoffrey Booth at a Houston University (is it A&M ? ) – and no doubt others – who could assist Philip and Leith.

In my view, political progress has been severely hampered in addressing these issues in Australia, because too many advocates and researchers have failed to discuss the Texas example in the public arena.

In large measure this explains why political progress is more advanced in New Zealand at this stage.

This needs to get underway with urgency in Australia – indeed it should have happened years ago.

Wow! There are a lot of people here who think they have all the answers.
I won’t be popular but I think Peter Fraser is the more sensible commentator of the arguers.
There is way too many variables including things that have been overlooked by genius PhD’s from both sides of this argument.
The subject is too complex to get to the bottom of simply by running a few graphs from your chosen periods (depending on which side you take).
My opinion (that’s right….opinion) , for what it’s worth, is that not too much drama will evolve without some major catalyst which can’t be predicted anyhow. Any sharp rise or fall will not be major in the short term and I think slow growth would be the most likely scenario, considering that is the aim of all economies and sectors within.
I think everyone should calm down. it’s like using models to predict weather and climate change while forgetting to look out the window!

a very interesting thing to note is the ABS: PROPORTION OF INCOME SPENT ON HOUSING BY TENURE BY INCOME QUINTILE.
You will notice that income spent on rent VS motgage historically follow each other regardless of income.
The obvious question to ask then, is, what does the graph look like which charts the amount spent on rent over ant given period of time.
I am no genius but, at least in our cities, I am fairly sure that rental prices have not taken any significant downturn at all.
This tells me that investor confidence and money shifting between sectors may drive property prices up and down slightly over shortish terms, but, the long term trend will be up or we will all be out of the market……unless, of course, we all have no income and we all sell our houses and the whole world goes into a holocaust-like depression, in which case, who cares about house prices?